Pulmatrix Up 1778% – Relax, It’s A Fall Following A Reverse Stock Split

Pulmatrix (NASDAQ: PULM) stock has not exactly done well by its owners this past year with a 79.95% (heck, let’s call it 80%) fall in the past 12 months. Until the events of this morning, premarket, where Pulmatix registers a 1778% rise in the stock price. This is easy enough to explain, there’s been a reverse stock split. What we should also note is that the 1778% rise in the quoted stock price is also actually a fall in the overall corporate valuation. Which isn’t, when we come to think of it, an encouraging sign for the point of a reverse stock split is to increase said corporate and overall valuation.

In terms of the last results (EPS miss of 0.08 on a minus 0.15 figure – not just a loss but double the one expected, on revenue down 75% YoY) that the Pulmatrix stock price is down in the weeds isn’t a great surprise. What the company actually does is it’s a clinical stage biopharma company looking into inhalable drugs for lung conditions – anti-fungals in particular. From the performance we might think that it’s not doing very well at this and we might be right.

To the specifics of this current price movement though. A stock split is when one share becomes two – or more of course. A reverse stock split is when two pieces of stock become the one, logically enough – Brits will know this as a consolidation.

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Partly such things are just fashion. They should make no difference at all to the valuation of a company. 1 million shares at $1 gives the same corporate valuation as 2 million at 50 cents each. One of the little puzzles of stock markets is that this isn’t, in fact, quite true. British markets tend to value companies slightly higher if their share price is between £1 and £10. American markets provide that slightly higher valuation for those whose stock is between $10 and $100. This is what American Depositary Receipts are usually made up of 10 pieces of London issued stock – to be in the sweet spot for both markets.

There is no particular reason anyone knows of for these different tastes, they’re just things that are. Stock splits and reverse splits (consolidations) tend to happen to keep share prices within those fashionable areas.

This is not wholly and absolutely true though. NASDAQ has a rule that if the stock price is below $1 for some period (usually 18 months) then the NASDAQ listing will be lost. “Penny stock” just has bad vibes in the American mindset. So, if a stock price has been below that $1 a reverse stock split is performed to get it back over it. As here with Pulmatrix, a 20 for one reverse.

In this case the reverse split should in fact increase the value of the company. That uncertainty about the continued NASDAQ quotation is resolved. But the opposite has happened – a 20 for 1 should lead to a 2,000% rise in the stock price, but it’s only been that 1778%. That is, the overall corporate valuation has just declined. That’s not a good result.

The market’s evaluation therefore seems to be that until Pulmatrix is able to show some interesting actual business results then the stock isn’t of any great interest. If even retaining the NASDAQ listing doesn’t produce a rise in valuation then it is those business fundamentals, not tactical market moves, that matter.